Chinese Entrepreneurs Discard Silicon Valley’s Model

“Build high walls, store up grain, and bide your time before claiming the throne.”

So ran the philosophy of the 14th century emperor Hongwu, who outlasted dozens of competing warlords to found the Ming Dynasty in 1368. Centuries later, the same mission statement was embraced by Wang Xing, founder of the world’s largest online and on-demand delivery platform, Meituan-Dianping. A superior product was Xing’s “high wall,” venture funding was his “grain,” and a trillion-dollar market cap would one day be his “throne.”

Founded in 2010, Meituan began as a copycat of Groupon. Over time it has has emulated Friendster, Twitter, and Facebook. Wang is not the only copycat: Many Chinese companies began that way starting around 20 years ago. Naturally, Wang’s accomplishments aren’t going to win him any garlands from Silicon Valley, which still generally thinks of Chinese tech companies as pretenders who won their home market with the help of government protectionism. While some Silicon Valley leaders did concede recently that Chinese entrepreneurs work much harder, their viewpoint is missing something important. Over the past two decades, an entrepreneurial approach and ecosystem has emerged in China with equal legitimacy, vibrancy, and a value-creation potential to that of Silicon Valley itself.

Kai-Fu Lee

It’s no wonder the Chinese founders initially turned to their more advanced American counterparts for inspiration; they needed to build companies with sparse funding for a small market. When Sergey Brin and Larry Page founded Google in 1998 just 0.2 percent of the Chinese population was connected to the internet, compared with 30 percent in the United States. And though no serial copier will achieve real greatness, emulation was a great way to get started — and some of those copycats have innovated very well over time.

And remember that while Silicon Valley’s founders grew up in an abundant environment, Chinese entrepreneurs grew up in poverty, fighting for a chance to be among the first in Deng Xiao Ping’s famous mantra: “Let some people get rich first.” The Chinese market has grown rapidly over the past 20 years as tenacious and hungry entrepreneurs competed on their speed and execution to attract capital and then turned this into competitive advantages.

Meituan is an interesting example of this entrepreneurial approach. In the face of thousands of Groupon-like companies, Meituan chose to differentiate itself by raising a lot of capital to solve a really difficult problem: changing the way Chinese people eat. Wang Xing discovered Chinese ‘netizens’ would change their eating habits to rely more on food delivery if the food could be delivered in 30 minutes at less than the equivalent of $0.70. With this in mind, he built a gargantuan infrastructure to eventually reach that goal. This infrastructure included the use of artificial intelligence “shortest-path” finding, an Uber-like model for delivery people, incentive systems, low-cost electrical mopeds (and dealing with battery depletion issues,), and managing an army of 600,000 delivery people.

This kind of capital-intensive approach would generally be viewed as not fitting the Silicon Valley mission/tech-driven approach, as evidenced in OpenTable, Groupon, and Yelp. And yet none of the U.S. companies were able to achieve the kind of scale and disruption accomplished by Meituan. Furthermore, by building such an incredibly ambitious network, Meituan has raised the entry bar for other companies that might want to enter their space, achieving a nearly impregnable business model. To date, Meituan has become a combination of OpenTable, Groupon, Yelp and a lot more that delivers food to your doorstep.

Winner Take All

(Illustration: Emmanuel Polanco for Techonomy)

There are many examples of this in China. Didi (the “Uber of China”) gave away massive subsidies to win market share, and is now investing in auto insurance, leasing, gas stations, and auto repair to strengthen its stranglehold on the market. Meanwhile, retail marketplace Taobao, in its early days, offered lifetime free listing and no transaction fees for its sellers, which effectively caused eBay’s market share to drop from nearly 100 percent to zero.

China’s internet ecosystem has become a winner-takes-all game. Amid the chaos, the foreign first-movers often prove irrelevant. It’s the domestic combatants who push each other to be faster, nimbler, leaner, and meaner, learning to make their products better, and so inspiring a truly maniacal work ethic. Silicon Valley prides itself on long working hours, an arrangement made more tolerable by free meals, on-site gyms, and beer on tap. But next to China’s startup scene, the Valley’s companies look positively lazy and lethargic.

Such an environment has led to innovations as yet unseen in the U.S., such as an almost cashless and cardless society, an editor-free news engine creating more user addiction than Facebook, 60 million shared bicycle rides per day and a country that orders takeout 10 times more than the United States.

Survival has also required relentlessly controlling costs, executing flawlessly, generating positive PR, raising money at high valuations and seeking ways to build a robust business ‘moat’ to keep the copycats out. This trial-by-fire landscape has had the result of forging a generation of the most tenacious entrepreneurs on earth. Where Silicon Valley goes for breakthrough innovation, China’s companies have flourished through a fusion of ideas and massive capital outlays.

Only Silicon Valley could produce Steve Jobs, Apple, Google, and SpaceX. It has everything to be proud of. But China has proven that a model built on Emperor Hongwu’s playbook 650 years ago can also produce riches galore.

Kai-Fu Lee is CEO of Beijing-based Sinovation Ventures and founding president of Google China. He will be speaking at Techonomy 2018 this Monday. Tune in to the livestream from our homepage to hear him and all the speakers, beginning Sunday at 2 p.m. PT.

Hi,
Interesting article. But one question. If a company invests heavily at startup and then dominates an industry, what prevents it from becoming a monopoly. And once a monopoly, why wouldn’t it do all the bad things that monopolies do: limit competition, inflate prices, lag behind with innovation, etc.